Dell faces goal-line stand by angry investors in bid to go private

Dell's largest investor says company worth double the price.

When the Baltimore Ravens won the Super Bowl, John Harbaugh said the win "wasn't pretty, but it was us." Now, the CEO and founder of Dell, Inc. is facing the same sort of scenario as he's looking to take Dell private—it's going to be ugly and very much in the character of Michael Dell.

Dell is planning on paying stockholders $13.65 a share to take the company private—a price that has the feel of a Ray Lewis sack to some investors. And that has Dell's biggest stockholder calling for a personal foul.

The investment firm Southeastern Asset Management, which owns 8.5 percent of Dell’s outstanding shares, has sent a letter to Dell's management today expressing its outrage, saying that the firm will vote against the deal. “We are writing to express our extreme disappointment regarding the proposed go private transaction," the letter said, "which we believe grossly undervalues the company. We will not vote in favor of the proposed transaction as currently structured.” The firm also promised a proxy fight, lawsuits, and any other means available under Delaware law and regulations to stop the deal cold in its tracks.

Southeastern would have supported the deal, the firm said in its letter, if it "would have provided full and fair value to Dell’s public shareholders." And the number the firm puts on fair is at least $24 a share—a price that would require Dell to come up with $17 billion more to make happen.

As we reported, Dell's board of directors approved a plan to take the company private for roughly $20 billion, funded by a patchwork of cash, stocks, and debt that amounts to 22 times the company's net income in 2012. Dell submitted the details of its planned leveraged buyout to the Securities Exchange Commission on February 5, and they reveal the real winners in the deal: Michael Dell, the bankers, and Microsoft. It's not clear that Dell as a company gets anything more out of the deal than allowing it to tell investors to shut up.

The thug life

Michael Dell has a long-running reputation of playing hardball (to put it generously). He has also earned a reputation for being a less-than-ethical capitalist in the way he has run both Dell and his personal investment firm, MSD Capital. When he returned to his eponymous computer hardware company in 2007, he became the sixth-highest paid CEO in America, earning more than $153 million in overall annual compensation as he laid off thousands of employees and shut down US manufacturing.

In October, the company forced employees to sell many of their shares back to the company at $9.55 a share because of a policy that set the maximum amount of shares any employee could hold in their 401k plan—this, as the company was in the midst of negotiating a buyout deal.

If shareholders approve the deal, Dell the company will end up in the hands of Denali Holding Inc. (a Delaware corporation), a collection of Denali paper subsidiaries created for the express purpose of the buyout formed by Michael Dell, the investment firm Silver Lake, and other investors on January 31. But the company's destiny will be at least partially in the hands of the banks holding Dell's debt: Bank of America, Barclays, Credit Suisse AG, and Royal Bank of Canada.

In order to take Dell private and pay $13.65 per share to reclaim the 1.4 billion outstanding shares of Dell stock not held by Michael Dell's MD Investors private investment fund, the company has commitments from four banks and their affiliate organizations to provide seven different loans and revolving credit instruments totaling just under $14 billion. There's also a $2 billion loan from Microsoft. The 8-K report filed by Dell doesn't discuss what the interest rates on these loans and revolving credit instruments are.

The remainder of the cash required to pay off stockholders will come from Michael Dell and a group of investors supporting him, his MSD Capital personal hedge fund, and investment firm Silver Lake—as well as roughly $2 to $3 billion from Dell's cash on hand.

There's also a small matter of Dell's existing public debt. The company can't drop off the SEC's radar entirely unless it also liquidates the bonds that it has sold as investments. Dell may end up paying off much of its short-term bond debt as part of the deal, but it's not going to be completely off the hook for things like SEC reporting and Sarbanes-Oxley compliance as long as it still has long-term bondholders to answer to.

So what exactly is Dell getting out of this other than blowing $2 to $3 billion of the company's cash on hand (at a minimum) and taking on $16 billion in debt?

Taking the ball and going home

Although going private while still having public debt doesn't make its compliance problems go away—which means the company will still have some serious accounting overhead—the deal does give Michael Dell more control over the company he started out of his dorm room. And if he has his way, it won't be anything like that company he started in his dorm room ever again.

I spoke with Gartner analyst Mikako Kitagawa, who tracks Dell's PC business, about the potential impact of going private. While she hesitated to make any major projections, she said that it seems likely Dell will do what it has been positioning to do for the past few years—exit the consumer PC business to focus on business customers.

In order for Dell to survive in the larger PC market, Kitagawa said, it would require "a lot of investment in different areas, and I don't know that they want to do that." No other major PC manufacturer is privately held, and almost all of them are dependent in part on the relative liquidity of being public to allow them to make those sorts of investments—acquisitions, in particular—without spending real cash.

Getting rid of the consumer business is freeing to Dell in many ways. For one thing, it frees Dell from having to cater to consumer aesthetics for the high end or trying to cut costs for the low end of those markets. By focusing on business, Dell can still sell PCs and other client hardware as part of all-inclusive deals (or at least try) without having to worry so much about whether its notebooks and other devices are objects of desire or cheap enough to justify not buying an Asus or Acer.

So it's possible that in order to invest in the ways Dell will need to in order to compete with Hewlett-Packard and IBM in the enterprise space as a full-service, Dell-Consultants-at-your-deskside sort of provider, the company will sell off the consumer PC business once the leveraged buyout dust settles.

But Dell has already essentially eliminated its consumer group, at least from an organizational standpoint. On January 10, the company filed a report with the SEC that it would be changing its reporting structure, eliminating reporting by customer segment (Large Enterprise, Public, Small and Medium Business, and Consumer), and replacing that with functional group reporting (End User Computing, Enterprise Solutions Group, Dell Services, and Dell Software Group). So it may just stop making consumer hardware—or at least stop trying to make its hardware appeal to consumers.

Hedging bets, thrown for losses

Microsoft's loan to Dell is an interesting piece of the puzzle. It gives Microsoft a guarantee of some sort of ongoing revenue out of Dell as long as the company remains solvent, and it also gives Microsoft some influence over the direction Dell takes as it bails on the consumer market. By backing Dell, Microsoft is ensuring that a major original equipment manufacturer is selling systems with Windows licenses, but it's also keeping them out of the way of Microsoft's own consumer ambitions with Surface.

The banks win because, no matter what, they've made a big up-front (at least on paper) profit from lending Dell money just from the associated fees that come with the loans, and the banks are guaranteed to make significant interest income as long as Dell doesn't fall on its sword. If Dell ends up selling off pieces to recapitalize, it will still come out ahead of everyone else—including bondholders who hold Dell's long-term debt. Enterprise customers of Dell may end up happier, in some respects, because as a smaller, privately owned company, Dell could be more responsive (in theory) to its big customers' needs while management could ignore the whims of the market. HP even wins, because it will lose its biggest competitor in the consumer PC space.

Consumers who own Dell hardware may find their product supported by someone else, or not at all, depending on what happens to that line of business. But the big losers are the people who have been betting on Dell by investing in the company over the past five or six years—and possibly a number of Dell employees who could be shed in the coming reorg.

So it's no surprise that at least one major Dell investor is planning a goal-line stand to block the plan. The only question is whether it can pull together enough resistance to Silver Lake and Dell's offensive line. And boy, is it offensive.

In this context, I look upon consumers buying PC's as I would millions of tiny reviews of those products - in that, if consumers don't find them a good value proposition, I kind of doubt businesses ultimately will either.

Even if Dell succeeds in doing the buyout at the preferred price, there is no guarantee that the business will succeed. By going private they cut themselves off from a number of important means of financing, and are much more dependant on self capitalization, lending institutions and bonds.

As a smaller company, they may find themselves cut out of certain propositions. IBM could slaughter them. There is also no evidence that Michael Dell is a particularly good CEO. The company has performed poorly since he came back.

In this context, I look upon consumers buying PC's as I would millions of tiny reviews of those products - in that, if consumers don't find them a good value proposition, I kind of doubt businesses ultimately will either.

Except that their business PC and business services are completely separate from their consumer products and have been for a long time. If you buy a Dell business PC you go through an entirely different process and get and entirely different level of product and support. Their consumer stuff is meh, their business stuff is good.

I'm still unclear why going private is a good thing, here... and if they do go private, aren't they forced to pay market prices for their stocks? It's not like they can just pay whatever they want, is it?

But the big losers are the people who have been betting on Dell by investing in the company over the past five or six years

Dell stock was at $10.88 the day before news of the buyout emerged. The buyout price was a 25.5% premium to what the market felt was the fair value of the stock. Current investors of Dell actually gained from this buyout, at least in the short term.

It seems kinda funny if Dell's plan is to make business PC's that are neither the cheapest nor the nicest. So they'll be aiming squarely for mediocre? Who wants that?

Business IT, at least of the mega-scale variety, doesn't much care if the product they're deploying is attractive, desireable, or even particularly well-made. They care that the total service contract is reasonable, efficient, and predictable over the life of the buy.

If this deeply mediocre ThinkCentre on my desk goes down, the IBM guy bring in a new one in less than 4 hours.

From what I've read about this from financial websites (the Wall Street Journal) Southeastern Asset Management and other institutional investors will lose money with this buyout because they bought Dell stock at $16 to $24 per share.

As I understand it, Southeastern Asset Management believes that Dell's stock price would be more valuable if Dell sold off certain assets.

Quote:

In its letter, Southeastern said it believes the company is worth almost $24 per share. It said that if Dell sold pieces of its business it would also likely generate a better return to shareholders than the management-led buyout.

(Google in news "dell wall street journal" to see the article without a subscription)

They don't want to make PCs in general. More servers and software/services.

I agree. Unfortunately for them they have no expertise in software or services, and IBM's move into this area is just about played out anyway (it was never intended to be more than a short-term profit and stock price pump, in combination with selling off stuff like PCs and other unprofitable businesses, that would be displaced by something better as soon as they thought of one, but they never did...) So Dell will be stuck trying to make a buck out of servers almost exclusively, at the very time when the biggest customers for such gear are rolling their own instead of buying from traditional server vendors. Good luck with that!

Author, you should have clearly labeled this article as being op-ed. It's clearly not an unbiased news article. I wish Ars had some news ethics. Clearly it doesn't either.

I agree that the article is deeply slanted. But ars has always made it quite clear that they promote editorial voice. The author's opnion reads as well-supported, even if I don't share his conclusions.

As I understand it, Southeastern Asset Management believes that Dell's stock price would be more valuable if Dell sold off certain assets.

There are of course, multiple ways to arrive at a Company's value, and Tangible Assets less Liabilities divided by Shares Issued is only one. The Market in essence, votes with its dollars on a Company's ability to turn all of its Asset (tangible and otherwise) into cashflow. It's not at all uncommon for the market to believe that a Company is *less* than the sum of its parts, as it (arguably) does with Dell. In that case, the challenge will be for Southeastern to convince a majority of shareholder that they are better to a) force the company to stay public; or, b) liquidate and dissolve rather than accept a 25% premium to the pre-offer price. I sort of doubt that either will happen.

Really says something if both Dell and HP have considered dropping their consumer divisions within the last few years.

Not really.

Dell and HP raced to the bottom to build the lowest quality cheapest unit available, at the lowest price points . When racing to the bottom you have to either chicken out and leave or your a smear on the ground.

Apple and Levono, are still going strong because they build quality hardware, they charge more for. You can increase profits by selling more units or by selling few variations of units and getting better pricing on parts.

The overall computer market while "growing" is growing overseas, you can only sell so many desktops once you hit that number even in the USA you are going to taper off. 300 million people if each buys one unit means 300 million people don't have to buy a computer for 3-6 years. That makes a FINITE market. Sooner or later everyone has a TV and won't be looking to upgrade.

I'm still unclear why going private is a good thing, here... and if they do go private, aren't they forced to pay market prices for their stocks? It's not like they can just pay whatever they want, is it?

It gives you greater autonomy (you don't have to answer to shareholders, as there are none), in exchange for hampered ability to finance the company.

Seems to be a tremendous waste of time in my opinion, but as a consumer I can't say that I care. I can't think of the last time Dell was relevant to me.

This reminds of Jerry Yang rebuffing Microsoft and ending up with Jerry losing badly. If you recall, Yahoo stock dropped so much later that many people lambasted Jerry for that.

Dell is not going to be any more valuable in the future - whether public or private. Whoever this guy is blocking the deal should know that and quit whining. After all, why is he holding on to so much Dell stock? He must be from another plant. Just move on and just sell Dell at a loss.

Does he envision that Michael Dell will resurrect Dell the way Steve Jobs did with Apple?

Somewhere Michael Dell must be grinning that there is still someone in this whole wide world who still thinks that highly of him- a clown.

Mr. Dell is deluding himself if he thinks he can compete solely in the business pc arena. Dell is miles behind Cisco, HP, and IBM in server blades and desktop PCs aren't much better than their counterparts.

Well if Southeastern Asset Management really thinks Dell is worth $24 a share they could purchase up any stock that's being traded at increasingly higher prices to drive it up to $24/share. They're not going to do that though seeing as they don't really care whether or not the stock is worth that, they just want to get significantly more than they would get by dumping the stock at its current $13 and change per share.

Apple and Levono, are still going strong because they build quality hardware, they charge more for. You can increase profits by selling more units or by selling few variations of units and getting better pricing on parts.

Apple trades on its brand, not on quality. If they had to compete on quality, they'd lose. Course, one could argue that's exactly what has happened.

From what I've read about this from financial websites (the Wall Street Journal) Southeastern Asset Management and other institutional investors will lose money with this buyout because they bought Dell stock at $16 to $24 per share.

And thus when facing having to book a $3-13 loss per share on 9% of the issued stock, it's got to be worth SAM calling in the lawyers. Looks like sharp practice on the employees having to sell back "excess" shares a few months earlier.

This son of a bitch has the gall to say "We're hiring in the US" when he has systematically shit canned US jobs in manufacturing and technical support/customer care? Go fuck yourself Michael. Here's two giant middle fingers from what used to be Dell AES Twin Falls. I hope you completely lose your company with this move.

What is it about the Silicon Valley culture that brings out the "monster" in tech company CEOs? It seems egotistical bastards run all the largest tech companies. Is it because they skipped the ethics classes? At least they don't all "Gorilla-dance" in public.

It seems kinda funny if Dell's plan is to make business PC's that are neither the cheapest nor the nicest. So they'll be aiming squarely for mediocre? Who wants that?

Businesses do. They don't care what the machine is, they just want service contracts that make their IT staffs jobs as easy as possible. So they overpay by a huge margin, get garbage machines that negatively impact employee productivity, but hey the IT guys have it easy so, worth it!

Apple and Levono, are still going strong because they build quality hardware, they charge more for. You can increase profits by selling more units or by selling few variations of units and getting better pricing on parts.

Apple trades on its brand, not on quality. If they had to compete on quality, they'd lose. Course, one could argue that's exactly what has happened.

One can argue both of your points, because they are both wrong, and you are just trolling.

Management, by law, has a fiduciary duty to the corporation's stockholders. In plain English it must look out for the stockholder's interests above all else. In practice, that means maximizing shareholder value.

If management, however, wants to buy out the shareholders, that raises the suspicion that they see some value in the company but they want to keep it all to themselves. So they won't tell the shareholders about the perceived hidden value, take the company private at a bargain sbuyout price, then unlock the value and reap the bonanza themselves.

Well then, if they do this, then aren't they violating their fiduciary obligations to the shareholders? If they see value that can be unlocked, isn't it their duty to unlock it for the shareholders not for themselves?

That's why management buyouts should be illegal. The conflict of interest is just so big. Another one is golden parachutes, the bribes that management solicits in exchange for recommending to the stockholders that they accept a tender offer. But these corrupt practices will never be outlawed because congress is too deep in the pockets of Wall Street and corporate fat cats.

Management, by law, has a fiduciary duty to the corporation's stockholders. In plain English it must look out for the stockholder's interests above all else. In practice, that means maximizing shareholder value.

If management, however, wants to buy out the shareholders, that raises the suspicion that they see some value in the company but they want to keep it all to themselves. So they won't tell the shareholders about the perceived hidden value, take the company private at a bargain sbuyout price, then unlock the value and reap the bonanza themselves.

Well then, if they do this, then aren't they violating their fiduciary obligations to the shareholders? If they see value that can be unlocked, isn't it their duty to unlock it for the shareholders not for themselves?

That's why management buyouts should be illegal. The conflict of interest is just so big. Another one is golden parachutes, the bribes that management solicits in exchange for recommending to the stockholders that they accept a tender offer. But these corrupt practices will never be outlawed because congress is too deep in the pockets of Wall Street and corporate fat cats.

Stockholders are not the be-all end-all of corporations. Stakeholders count: customers, employees, management, the public. You're right, the system sucks, but certainly not for stockholders. They get to gamble on other peoples' livelihoods and only get taxed 15%. They should suck it, it's a horrible system that has resulted in layoffs, bad health care and the rich getting richer. Publicly held companies need to have employee and customer board representation to balance the system out. The current system is plutocratic, not democratic and we can do better.

Sean Gallagher / Sean is Ars Technica's IT Editor. A former Navy officer, systems administrator, and network systems integrator with 20 years of IT journalism experience, he lives and works in Baltimore, Maryland.